You purchase a fully-occupied shopping center for $5,000,000. The NOI is $750,000. The property has no...

You purchase a fully-occupied shopping center for $5,000,000. The NOI is $750,000. The property has no debt. You are considering obtaining debt in order to maximize your return. If a Lender is willing to provide a loan at a 75% LTV, 3.00% rate and 20-year amortization schedule, what is your: (a) Unlevered Return, and (b) Levered Return?

Expert Solution

a. unlevered return= return on investment/total value of the asset=750,000/5,000,000=.15 or 15%

b. levered return= return on investment- interest cost/value of asset+ loan

Value of loan = 5,000,000* 75%= 3,750,000

interest cost= 3,750,000* 3%= 112,500

Levered return= 750,000-112,500/(5,000,000+ 3,750,000) = .07825 or 7.825%

ekkarill92 answered 3 years ago

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